Heavy-handed Approach: Authorities Employ Penalties Rather Than Incentives on Informal Sector Enterprises
In a bid to address the disparities between the formal and informal sectors, the Zimbabwean government is planning to formalise the informal sector while ensuring compliance with legal requirements, including tax obligations. Led by Finance Minister Mthuli Ncube, the government aims to adopt a multifaceted approach that promotes registration and tax compliance through supportive measures, rather than heavy-handed enforcement.
Industry leaders, including the Zimbabwe National Chamber of Commerce (ZNCC), have called for a unified taxation approach to bring informal businesses into the tax net more effectively. This would reduce the tax burden on formal businesses while expanding the taxable base by incentivising informal sector players to register and comply.
Strengthening regulation and quality control is another key aspect of the government's strategy. The informal sector often floods the market with substandard goods, undermining formal businesses and consumer safety. Stronger regulatory measures to monitor and control product quality would protect consumers and formal industries from unfair competition and health risks.
Addressing the high cost of doing business is also crucial. Businesses face multiple cost pressures, including power outages, currency volatility, high interest rates, and various compliance costs. Reducing these costs and improving basic infrastructure would ease the burden on formal businesses and make it more attractive for informal businesses to transition formally.
Support for formalisation is not limited to the formal sector. Policies should balance enforcement with support measures such as access to finance, business training, and simplified registration processes. This can facilitate the transition from informal to formal without causing significant disruption to livelihoods.
Improving urban governance and service delivery is another critical component of the government's strategy. Informal settlements and informal economic activities often arise from failures in urban governance and service provision. Strengthening local government capacity, enhancing accountability, and involving communities in governance can reduce informal economic activities born from structural exclusion.
Leveraging technology and citizen engagement can also play a significant role in promoting compliance. Utilising digital tools and community-driven initiatives to increase transparency and compliance can create a culture of accountability that supports both sectors' growth while discouraging informal evasion and malpractice.
However, the government's approach must be mindful of potential pitfalls. For instance, protecting formal retailers like OK could potentially harm small businesses and the public. The ZNCC believes that compliance should be made more appealing, not punitive non-compliance. The harsh tax regime in Zimbabwe could cause many informal businesses to fail if compliance is enforced.
Moreover, suppliers are choosing to supply the informal sector due to quicker payment, as formal retailers often take months to settle obligations. This delay in payment from formal retailers results in suppliers incurring losses in an inflationary economy. The ZNCC argues for policy changes to make compliance more attractive in the informal sector.
One of the challenges for formal retailers like OK is their obligation to abide by the formal exchange rate. The informal sector, on the other hand, offers cash on delivery to suppliers, which is why some shelves are empty in formal retailer supermarkets. The ZNCC is advocating for policy changes to reduce government restrictions and streamline tax burdens in the informal sector.
In a normal economy, businesses are incentivized to formalize due to the benefits. However, in Zimbabwe's current economic climate, the informal sector is putting pressure on the formal sector, offering lower prices due to non-compliance with statutory obligations. The ZNCC suggests that compliance should be made attractive, rather than making non-compliance punitive.
In essence, Zimbabwe should pursue an inclusive approach that promotes registration and tax compliance through supportive measures rather than heavy-handed enforcement, while addressing infrastructure and governance challenges that drive informality. This balanced strategy would protect businesses and consumers, improve government revenue, and foster sustainable economic development.
The Zimbabwe National Chamber of Commerce (ZNCC) advocates for a unified taxation approach, as this can incentivize informal sector players to register and comply, while reducing the tax burden on formal businesses and expanding the taxable base. Additionally, supportive measures such as access to finance, business training, and simplified registration processes can facilitate the transition from informal to formal without causing significant disruption to livelihoods.
